Player Coach

AT AGE 24, Robert Smith felt pulled in two directions, as a new dad and as a student entering the ultra-competitive Darden Graduate School of Business Administration at the University of Virginia.

His wife, Terri, recently had given birth to their first son, Brendan, and fatherhood consumed Smith's mornings, days and nights. It became tougher to burn the midnight oil and master the case studies integral to the successful pursuit of an MBA.

Necessity made him cram more studying into much less time, so Smith devised a strategy that fed off the herd mentality of his fellow students and let him do well in the probing classroom discussions that are a key part of academic business analysis.

"I took a close look at how these discussions were structured and found that most people spent time preparing for the first question," says Smith.

"Instead, I concentrated most of my time on what I thought would be the second question." In addition, he found that "the students were so afraid of looking dumb, they were focusing on the details and not on what the exercise was about."

And he adds: "It's like that in managing portfolios. It takes a lot to break away from the crowd."

That was 18 years ago. Since then, Smith, who runs the
T. Rowe Price Growth Stock
Fund, has benefited from his tendency to think independently.

His independent streak was very much in evidence in 1999, when the Internet bubble was swelling. Even a growth-oriented manager must bow to reality when market valuations move out of whack, as they did during the bubble year of 1999. At the time, he concluded that the fund's long-term interests would be served by avoiding such tech high-flyers as
Yahoo!
which pushed above $200.

Yahoo shares cratered over the next few years, being down 96% at one point. (Since Jan. 1, the stock has roughly doubled to a recent 35.)

"Working at a place like T. Rowe has allowed me to follow my convictions, even if those convictions punish returns in the short term," Smith says. "What helps is having access to senior managers who've weathered previous cycles." Smith joined T. Rowe in 1992, after working for five years as an analyst at MFS Financial Services in Boston. He became portfolio manager of the growth fund, which has $4.4 billion in assets, in 1997.

One of his former MFS colleagues, Lisa Nurme, a portfolio manager who directs MFS's equity value division, remembers him fondly. "He's a very open guy, particularly unusual for this business," says Nurme.

"He would disarm managements and then surprise them by getting right to the heart of the matter. He would never over-complicate issues. That's a tremendous skill for an analyst or a portfolio manager," she observes.

In moving to Baltimore, Smith was returning to the city where he and his three siblings were reared. It's also a hotbed for one of his passions: lacrosse. Baltimore has long rivaled New York's Long Island and a few other areas for national supremacy in the quick-paced and demanding game, first played by native Americans.

Smith, who has spent the last ten years coaching a youth team that has included his two sons (he also has a daughter), says that Baltimorean players are known for finesse, New Yorkers for ferocity.

"Money management's like coaching lacrosse because it's just a question of building a strong team and letting everyone play the game they're good at. Much of it involves getting out of the way and keeping the team focused on the big picture," he says.

Smith also tries to create the kind of environment where people learn from their mistakes. He says this comes from his approach to coaching. "It's simple. If you run down the field and two times a big guy stops you, by the third time you should know to pass the ball," he says.

Taking the metaphor further, he adds that one attribute that made him successful as a lacrosse player -- an ability to evaluate his own strengths and weaknesses and to find someone whose skills complemented those he was lacking -- helps him to succeed as a money manager.

"For instance, I never was a very good shooter, but I'm the kind of guy who can get the ball to someone who is. It's like that around here. We work in a very collegial environment where the managers see each other every day and share ideas and experience."

His goal is to load his portfolio with companies whose earnings are rising by 12%-to-15% annually and that have strong free cash flow. Over time, he believes, the stocks of such concerns will outpace the broad market.

"With this approach, the important thing is not what you pay for the stock, so much as being right on the company," Smith maintains.

"The difficulty comes in finding companies with the greatest growth in free cash flow and then determining how the company re-invests it."

The result is a growth fund with a conservative streak. Christopher Davis, fund analyst for the Chicago-based fund-tracker Morningstar, says that Smith's broader-than-average diversification and conservative buying style have helped the fund in the tough market of the past few year. "This fund lost considerably less than its peers and has bounced back faster in the current market," he says.

T. Rowe Price Growth Stock has recovered smartly this year from a 2002 in which it was down 23%, just a touch less than the S&P 500's 23.4% decline. Through Tuesday, it was up 19% this year, compared with 14.55% for the benchmark index. In 2000 the fund was up 0.3% but in 2001 it was down 9.8%, compared to drops of 10.1% and 12.1% for the S&P.

Smith's backbone seems to be comprised of the hickory found in a well-made lacrosse stick of old; he doesn't flinch from criticism. In fact, his criticism of his own 2002 performance was so scathing in the fund's annual report for that year that T. Rowe Price's compliance department advised him to soften his language.

Many of Smith's biggest bets are on stocks that he's held for years.

One is
First Data,
which recently was trading around 42. The Minneapolis-based transaction processor has a global reach and obtains half of its earnings from Western Union. A recent acquisition also offers a promising entree into the fast-growing debit-processing business. The fund first bought the stock in 1993 and has an average cost of $20.50.

UnitedHealth Group
is another favorite. The company has repurchased one-third of its stock over the past three years, while expanding its revenues by 20% annually. The fund started buying these shares in 1991 and has an average cost basis of $15.15. UnitedHealth shares recently were changing hands at 52.25.

Through mid-2003, the fund's 10-year annualized return of 10.87% beat the S&P 500's 8.01%, and is better than 91% of large-cap growth funds.

The five-year record of 1.37% is almost three full percentage points above the S&P's, and better than 90% of all large-cap growth funds, according to Morningstar.

The fund's boldest bet these days is on media stocks, based on improving advertising rates and hope for a better economy, particularly in light of the coming presidential election.

One of Smith's selections is
Clear Channel Communications,
a major operator of radio stations, which has been more aggressive in cutting expenses than some of its rivals.

The fund bought the shares before solid signs of an improved advertising environment had surfaced and before most other investors piled in.

"If you wait for the rate cards to pick up, for the actual datapoints to appear, it's difficult to make money," Smith asserts. "In recent months, being a contrarian has really paid off."

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